Introduction to Accounting

Question 1

What are the 3 types of profit making businesses?

Answer 1

Sole Traders, Partnerships and Limited Liability Companies.

Question 2

What is a sole trader?

Answer 2

A business owned by 1 person such as a plumber or and electrician.

Question 3

What is a partnership?

Answer 3

A business owned by 2 or more people (a group of sole traders) such as a small solicitors or accounting firm.

Question 4

What is a limited liability company?

Answer 4

A business owned by shareholders that is registered with Companies House. This business is a separate legal identity to its shareholders.

Question 5

What type of liability do the 3 types of businesses have?

Answer 5

Unlimited:
Sole Traders
Partnership

Limited:
Limited Liability Companies

Question 6

Who are the 7 users of financial information?

Answer 6

Investors
Employees
Lenders
Government
Customers
Suppliers
Public

Question 7

Why are investors interested in a business’s financial information?

Answer 7

To see whether a profit is being made to gain a return on investment.

Question 8

Why are employees interested in a business’s financial information?

Answer 8

To see whether the business will be able to pay their wages or salaries (job security).

Question 9

Why are lenders interested in a business’s financial information?

Answer 9

To see whether the business will be able to pay back any loans.

Question 10

Why is the government interested in a business’s financial information?

Answer 10

To see whether the correct amount of taxes are being paid.

Question 11

Why are customers interested in a business’s financial information?

Answer 11

To see whether the business will continue to operate so that they can still buy their products or use their services (going concern).

Question 12

Why are suppliers interested in a business’s financial information?

Answer 12

To see whether the business will be able to continue to keep purchasing supplies off them (going concern).

Question 13

Why are the public interested in a business’s financial information?

Answer 13

To see whether the business is showing corporate social responsibility. Also the public could be any of the other stakeholders.

Question 14

What is the Statement of Financial Position?

Answer 14

This is also known as the balance sheet. This is a list of all assets controlled and the liabilities owed by a business at a given date and the level of equity or owners capital.

Question 15

What is a Non-Current Asset and where is it found?

Answer 15

An asset that will be used for more than a year.

At the top of the Statement of Financial Position.

Question 16

What is a Current Asset and where is it found?

Answer 16

An asset that will be held for less than a year.

Under Non-Current Assets on the Statement of Financial Position.

Question 17

What is the order that Current Assets should go in?

Answer 17

In order of increasing liquidity.
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Stock, Debtors, Bank, Cash.

Question 18

What is Capital and where is it found?

Answer 18

Amount the business owes to the owner.

Under Current Assets on the Statement of Financial Position.

Question 19

What is minused from Capital on the Statement of Financial Position.

Answer 19

Drawings.

Question 20

What is a Non-Current Liability and where is it found?

Answer 20

Money that is owed for longer than a year.

Under Capital on the Statement of Financial Position.

Question 21

What is a Current Liability and where is it found?

Answer 21

Money that is owed but will be paid off in less than a year.

Question 22

What is the accounting equation?

Answer 22

Total Assets = Capital + Total Liabilities

Question 23

What is the Statement of Profit and Loss?

Answer 23

Also known as the Profit and Loss Account. It is a record of income recognised and expenditure incurred over a given period. It shows whether a profit or a loss was made.

Question 24

What goes in the sales section of the Statement of Profit and Loss?

Answer 24

Sales, (Return Inwards), Opening Stock, Purchases, Carriage Inwards, (Returns Outwards), (Closing Stock).

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Question 25

How do you calculate Gross Profit?

Answer 25

Gross Profit = Net Sales - Cost of Sales

Question 26

What is sundry income and where is it found?

Answer 26

Also known as additional income for example someone paying the business rent for subletting part of a property.

Found under gross profit and is added to it.

Question 27

How do you calculate the profit or loss for the year?

Answer 27

Profit or Loss for the Year = (Gross Profit + Sundry Income) - Expenses

Question 28

What is the Business Entity Concept?

Answer 28

A business is considered to be a separate entity to its owner so the personal transactions of the owner can not get mixed with the business transactions.